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Last updated: April 2, 2014 8:09 pm
Prada is slowing down. The share price – down a fifth in the past year – has been telling us this. The forward price/earnings ratio – down from 27 a year ago to 21 now – has been telling, too. And now the company’s numbers confirm it. Net income was flat last year against 45 per cent growth in 2012, and declined in the fourth quarter, suggesting the situation is deteriorating rather than improving.
None of this is what was expected, or at least hoped for, when the company floated in Hong Kong in 2011. Still, the reasons for the slowdown in luxury goods growth, largely to do with the Chinese and European economies, are well known and as one of the leading names Prada must plough on regardless.
Its plan for the next few years is driven by store openings, the expansion of manufacturing capacity, growth in menswear and the Miu Miu brand and, somewhat bizarrely, ownership of a renowned Milanese pastry shop.
Prada expects that in 2014 the top line will be driven by new store openings and a low level of growth in existing stores. The profit margin will be flat. But in the following couple of years Prada sees brighter prospects – existing stores do better (mid, rather than low, single-digit sales growth), the operating margin improves as the level of new store openings drops off. This is all based on annual industry growth rates that, according to research foundation Altagamma, will be 3 to 5 per cent between now and 2016.
So in a best-case scenario, and assuming the interest bill and tax rate stay flat, net profits will improve to perhaps €706m this year and €940m by 2016. The shares trade on 16 times those earnings. But what if 2014’s tough conditions persist and growth remains hard to come by? In a less optimistic scenario involving longer-term flat margins and single-digit sales growth, net profits might only be €840m by 2016 and the shares are on 18 times those earnings. Not cheap for profits three years out at a company in tricky markets.
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